The IMF mission to Egypt

The International Monetary Fund (IMF) has a fruitful history of cooperation with Egypt in terms of supporting the country’s economic reforms. Egypt has been a member of the IMF since December 1945, and it has drawing rights for loans in accordance with its financial quota. The role of the IMF is not to subsidise deficits, but to ease economic burdens through policy advice, loans and the sharing of expertise among member countries.

On the back of significant imbalances resulting in excessive public debt, a widening current account deficit and declining foreign reserves, the government launched a comprehensive economic reform programme supported by the IMF in November 2016, and the executive board of the IMF approved a three-year arrangement under its Extended Fund Facility (EFF) as financial assistance to Egypt. This took the form of a $12 billion loan equivalent to special drawing rights of $8.59 billion (or 422 per cent of Egypt’s quota). The amount of the loan is phased over the duration of the programme and is conditional on five reviews.

Egypt received the first tranche of the loan worth $4 billion in two instalments, the first, of $2.75 billion, at the end of 2016, and the second, of $1.25 billion, after the first review in July 2017. It is expected to obtain the second tranche of $2 billion before the end of 2017 after the completion of a second review by the IMF. In this framework, Egypt aims to demonstrate the positive economic developments that have

been achieved thanks to the successful implementation of the reform programme.

In the IMF staff report for the first review, it was emphasised that the government had taken decisive decisions in coordination with the Central Bank of Egypt (CBE) towards the successful implementation of the programme through floating the exchange rate, reducing the budget deficit, reforming energy subsidies, increasing the employment rate, and boosting labour force participation for women and young people. It also strengthened social protection measures to shield the most vulnerable to the short-term negative consequences of the economic reforms.

The reform programme started reaping benefits almost immediately, reflected in increasing economic activity that helped decrease the budget deficit by 50 per cent during 2016/17, falling by 1.8 per cent of GDP compared to 3.6 per cent in 2015/16. The country’s foreign reserves increased to around $36.53 billion at the end of September 2017. The economic growth rate increased during the last quarter of 2016/17 to 4.8 per cent, while the unemployment rate decreased to 11.9 per cent in 2017, compared to 12.7 per cent in June 2016.

However, inflation has also spiked to record highs with negative social implications. In response to this, the CBE has tightened monetary policy, and the government has increased spending on social protection in order to cover the implications of the subsidies’ removal that led to sharp increases in prices for transportation and consumer goods due to increases in the costs of production. Domestic electricity prices increased in July 2017 by between 18 and 42.1 per cent for the current fiscal year of 2017/2018. Fuel prices have increased by between 5.6 and 100 per cent. There has been an

increase in the new value-added tax (VAT) from 13 to 14 per cent.

On the other hand, the government and parliament have worked together to finalise the new investment laws that will help industry as well as small and medium-sized enterprises and thus help widen job opportunities and spur entrepreneurship. They will also help boost the industrial sector through implementing the government’s strategy of enhancing industrial development and foreign trade.

In general, the assistance provided by the IMF has helped Egypt successfully ease the burden of economic adjustment by addressing the sources of significant imbalances in the economy. The IMF-supported economic reforms aim at reviving the economy and maintaining financial stability, restoring economic growth, critical to enhancing the country’s debt-servicing capacity and reducing the share of debt in GDP, creating jobs, and shielding the most vulnerable in society during the period of the reforms.

It is crucial to continue efforts to carry out the ongoing economic reform programme, with inflation rates expected to decease gradually and no further depreciation of the exchange rate projected. Egypt has the potential to achieve higher economic growth rates and greater prosperity for society as a whole by implementing effective and well-coordinated economic policies that maintain sustainable economic development.

The writer is a lecturer at the Faculty of Economics and Political Science, Cairo University.